Navigating Nigeria’s Economic Crossroads: USD Liquidity and Naira Struggles

Once again, the Naira is nearing 1700 in the Parallel Market, wiping out the hint of optimism seen earlier this month when a touch of appreciation gave some hope of a long-term pull back in the market. While we’ll look to dissect the influence for market movements over the last month, now is the time to look forward. What options are left for the Government and CBN to instil a new wave of USD in country given their previous tactics of direct intervention are now losing their firepower?

Local Liquidity Tightening

Naira appreciation could be stoked by increasing USD in market, but equivalently pulling NGN liquidity out of the market can yield the same result (often seen during local holidays when fewer onshore market participants are actively selling Naira). The issue with this tactic for the CBN is that political capital can be quickly eroded when there is less money in circulation. However, sometimes reduced NGN liquidity can occur due to structural issues which are out of the Government’s control... Enter Zenith Bank.

Having informed the market that Zenith’s online banking would be undergoing maintenance work during the recent public holiday and hence being inactive throughout, account holders made necessary arrangements ahead of time. However, it was not anticipated that online banking would be down for over a week, with funds frozen and stranded out of reach of account holders. Much was publicised in the media around the public backlash against Zenith, but the economic consequence was an overnight tightening of NGN as suddenly there was far less funds in circulation.

Liquidity was further tightened by renewed enthusiasm among onshore investors to participate in the CBN’s Open Market Operations. With 731bn NGN clearing at rates around 24.3% on 1-Yr tenors, investor appetite was heightened after yields on auctions only a few weeks ago clearing closer to 18.5%. 

New USD Sources

While these were both material changes in the NGN liquidity picture, other factors generated a market narrative that helped fuel the appreciation. The announcement of $1.57bn coming to Nigeria from the World Bank buoyed optimism for renewed USD supply. However, funds were designated to Healthcare and Climate (ignoring any creativity to syphon funds elsewhere in the economy), plus the timeline for disbursements is spread across many months rather than in one lump sum. 

CBN Liquidity Balancing Act

However, contrary to the above, and likely in a bid to recover some political capital amid the structural tightening of liquidity in the economy, the CBN announced sanctioning of local banks whose ATM machines fail to dispense notes to customers, alongside a target to inject an additional 1.4Tn NGN of cash notes into the market. While the net effect will still remain an overall tightening of local liquidity, this move has every intention to quell risks of any unrest against President Tinubu in the short-term.

Dangote Local Crude Purchases

In the corporate world, renowned businessman Dangote continues to grab the headlines. We’ve discussed previously around agreements made with the NNPC to pay for domestic crude in NGN. We’re likely to start seeing some accumulation of local currency and drop in USD demand as crude imports from US, Brazil etc drop drastically. The caveat may be around the legitimacy of NAFEM closing rates to decide local currency crude prices which could re-stoke disagreements between Dangote and the NNPC.

While good news for the FX market, the trade off may still be another hike in local fuel prices as local distributors get squeezed further. With Dangote’s stance on any fuel subsidies to be removed in full, it’s likely that fuel prices will inevitably soar, putting more political pressure on President Tinubu.

The long-term focus for Dangote however will be whether we may start seeing exports of refined products once new refineries are up to full capacity. This could well be an important source of USD to rebalance Nigeria’s current account, even if this new hard currency supply does not filter into the economy as a whole right away.

Monetary Policy Tightening

Looking back to the CBN, a fifth consecutive hike came and went in September, bringing the headline rate up to 27.25%, totalling 850bps since February. Arguably these hikes are becoming ever more cosmetic. While the CBN will likely point to the effectiveness of their inflation targeting strategy given rates have dropped to six-month lows, there’s no secret that there are some heavy transitory effects at play here. 

The immediate effects of fuel subsidy removal and NGN devaluation are slowly falling out of the year-on-year window. Positive effects were seen from increased crop yields depressing food inflation, but ongoing depreciation will likely lead to renewed efforts to quell inflation being necessary and monetary policy is no longer the weapon of choice. If the CBN had a silver bullet, they would’ve played their hand by now.

NAFEM Developments

Switching focus to the future, the question still begs of how and when Nigeria will see renewed USD supply from Foreign Investors. Small steps were taken this month with the CBN announcing a new electronic NAFEM window that promises participants to have clear visibility on official NAFEM deals as they are offered and traded. While this will not spike Foreign Investor Confidence overnight, it’s a critical step towards having a fully functioning FX market which is a likely dealbreaker for some investors. Implementation will come over the following weeks and months, but the intention is clear and can only be seen as a positive.